Cash or Debit Cards? Payment Acceptance Costs for Merchants

Abstract

5 Fumiko Hayashi is a research and policy advisor at the Federal Reserve Bank of Kansas City. This article is on the bank’s website at www.KansasCityFed.org Over the last two decades, public authorities around the world have intervened in the payment card industry to address growing interchange fees charged to merchants for processing card transactions. The goal of these interventions has been to give merchants and their customers some relief from high fees, which are typically set by the card network (such as Visa or Mastercard) and received by the card issuer (such as a bank). The Reserve Bank of Australia, for example, started regulating interchange fees for credit cards in 2003 and debit cards in 2006. After a series of agreements between the European Commission and Visa and Mastercard reduced interchange fees during the 2000s, European Union legislators approved the European Commission’s proposal to cap interchange fees for credit and debit cards in 2015. In the United States, the Board of Governors of the Federal Reserve System implemented a cap on interchange fees for debit cards issued by large banks in 2011 (though credit card interchange fees have not been regulated). Despite this regulation, some U.S. merchants still consider debit card interchange fees too high. Interchange fees impose costs on merchants, but this does not necessarily mean accepting cards is more costly than accepting cash. Cash transactions impose costs as well: merchants may pay bank fees to